Question 58 from the Mock. Yuan Return: 18% Beginning Spot (Yuan/): 6.8 Ending Spot (Yuan/): 7.4 My Dollar return is the Yuan Return + The Currency Return (In currency of interest which is the ). What's the rationale of the 3rd term which is a quotient of the 1st two?! Evidently formula is =: return = Yuan return + Currency return + (Yuan Return times Currency return) Thanks
That is the amount that that the return is influenced by during the period of currency depreciation. The easiest way to do FX problems is simply (1 + Return)(1 + Currency Return) - 1 (1.18)[(1/7.4 - 1/6.8)/(1/6.8)] = 8.43% the correct answer?
I think it’s the currency effect on local market return. So First term is your Local market return Second part is Currency return and third part is currency return on your local return. At this point just memorize and dig details after June 4th.
I don’t have the book or the mock near me, but I think your case involves hedging the principal, where Schweser is hedging the principal plus the 18% return.
net return = local currency return + currency return (1 + local return)
stevenevans Wrote: ------------------------------------------------------- > net return = local currency return + currency > return (1 + local return) > > = 0.28412 Well that is definitely not right. Currency depreciated. Takes more Yuan to buy a dollar. It should be ~8.43% unless Schweser did rounding.
the profit also get appreciation if you don’t understand this you can simply apply beginning value x spot rate contrast ending value x spot rate same answer and more straightforward
Paraguay Wrote: ------------------------------------------------------- > stevenevans Wrote: > -------------------------------------------------- > ----- > > net return = local currency return + currency > > return (1 + local return) > > > > = 0.28412 > > > Well that is definitely not right. Currency > depreciated. Takes more Yuan to buy a dollar. It > should be ~8.43% unless Schweser did rounding. my apologies – should have changed to direct quotes
goodman2011 Wrote: ------------------------------------------------------- > the profit also get appreciation > if you don’t understand this > you can simply apply > beginning value x spot rate contrast ending > value x spot rate > same answer and more straightforward The currency had to depreciate. 7.4 Yuan to buy a dollar. Was 6.8 Yuan to buy a dollar. I need more Yuan to convert back at T1.
about 8.45%…remember to put foreign currency on bottom… Paraguay has told me that the last term is not considered if we are talking about foreign bonds…
june2009 Wrote: ------------------------------------------------------- > about 8.45%…remember to put foreign currency > on bottom… > > Paraguay has told me that the last term is not > considered if we are talking about foreign > bonds… The book told you that, I just repeated what the book said. There is an example from either 2004 or 2005, where they did that as well.
paraguay = book
I calculated 0.18 + (-0.0811) + (-0.0146) = -8.43% 18% = Yuan return [(1/7.4) - (1/6.8)] / (1/6.8) = -8.11% = Spot return 0.18 * -0.0811 = -0.0146= cross product Also works as 1.18 * 0.9189 = 1.0843 Thoughts? I’m not 100% confident on EDIT- I apparently can’t do basic math. Revised the above to include correct calcuations…
Currency depreciated 8.1% (.135135 - .147059) / .147059 = -8.11% 1.18 * (1-.0811) = 8.43% I think maybe just fat finger.
Alright, we’re in agreement Paraguay. I had the right calc, I just screwed up the spot return as I did it quickly.